Scranton recovery plan forecast calls for pain

MICHAEL J. MULLEN / STAFF PHOTOGRAPHER The recovery plan to-do list affects much of downtown Scranton, from its parking garages to tax increases on residents and commuters to phasing out “nuisance taxes” on businesses.

Described as a do-or-die proposition for Scranton, the recovery plan of Mayor Bill Courtright charts a difficult voyage to financial stability.

Presented July 2 by consultant Henry Amoroso, the plan sets forth a lengthy to-do list of tasks, each one its own piece of the recovery puzzle, including raising property taxes, reforming the pension system and selling assets.

The goal is to beat back deficits projected to soar and swamp the city. Under present circumstances, the city’s projected deficit is $4.8 million in 2014; $8.6 million in 2015; $12.6 million in 2016; and $14.3 million in 2017.

With a new recovery plan in hand, the city’s first action — a controversial commuter tax — was adopted July 31 by City Council, signed Aug. 1 by the mayor and will take effect Oct. 1. Next up will be an 18 percent property tax hike on city residents in 2015.

“There’s a lot of things in the plan that nobody wants to do, but if Scranton is going to survive, we’re going to have to do them,” Mr. Courtright said. “We tried to spread the pain.”

New mayor, new plan

Scranton has been designated as financially distressed under state Act 47 since 1992.

The city’s last recovery plan was crafted in mid-2012 by former Mayor Chris Doherty and council and the city’s Act 47 recovery coordinator, Pennsylvania Economy League. Some parts of that plan — higher property and real-estate transfer taxes — were implemented; while other planks — amusement and parking taxes — were passed but failed in collection and enforcement. The major initiatives, however, fell flat. The court rejected an Act 47 commuter tax, big donations from nonprofits never materialized and the city has been unable to obtain some $20 million in financing to pay the 2011 landmark state Supreme Court arbitration court award to the police and fire unions. That cost has risen to $22 million and grows daily with late interest.

Even before Mr. Courtright and a new council took over in January, the mayor hoped to bring on Mr. Amoroso as a consultant. The new mayor’s business administrator, David Bulzoni, immediately sketched out a framework for a recovery plan. Mr. Amoroso states in his report that he drew upon Mr. Bulzoni’s concepts and that PEL also lent its expertise and assistance.

Mr. Bulzoni said the administration from its start has been working on various fiscal issues, strategies and actions that are facets of the overall July 2 recovery plan. For example, in the spring the city authorized hiring financial advisory firm PFM Group of Harrisburg to help secure various long- and short-term financing in the bond and investment markets.

The plan also calls for a reopening of labor contracts with a goal of concessions and pension reforms. The administration says it has had preliminary discussions with the unions. Other actions, like selling parking garages, “have been under way in one form or another,” even before the recovery plan was done, Mr. Bulzoni said.

The city will use the estimated $22 million to pay down SPA debt from $53 million to $31 million, to lessen the amount the city owes.

Since 2012, SPA has needed annual city contributions to make bond payments. The former council in 2012 refused to cover SPA debt and allowed the agency — and city — to default. Banks and lenders walked away, SPA went into a receivership that now controls the garages and the city still has had to provide bailouts.

The idea now is to sell the garages, pay down SPA debt and refinance it so the city would have lower annual bailouts.

However, it’s not known how much the garages actually would fetch.

The city has discussed with PFM having it determine the market’s “appetite for the sale of garages.”

“We really have started to address the parking issues and really started to address it early on,” Mr. Bulzoni said. “That was one reason for bringing on PFM early on, because we immediately wanted to address the defaulted debt of SPA.”

■ Impose a commuter tax of 0.75 percent earned-income tax under state Act 205 on people who work in Scranton but live elsewhere, and put the $5.1 million from the first 12 months into the severely underfunded pension system.

This tax, enacted July 31-Aug. 1, now is pending in a 30-day window for legal appeals and would start Oct. 1.

The city would need this Act 205 commuter tax for at least three years, but there also is no time limit. Hazleton has had a similar Act 205 tax, on both its own residents and commuters, for 30 years. A pending state “equal treatment” bill would require a municipality that levies an Act 205 earned income (wage) tax on commuters to fund pensions to also impose it on its own residents.

Mr. Courtright and council say they do not intend to increase the city’s wage tax on city residents, but are noncommittal on what they will do if the equal-treatment amendment passes.

■ Reopen and restructure the city’s contracts with its employee unions.

The focus should be on negotiating appropriate health care benefits and, especially, pension reforms, such as higher employee contributions, ‘migration’ toward a defined contribution or hybrid plan for new hires, later pension eligibility dates, changes to starting salaries, time between salary steps and ranking standards/distribution, according to the plan.

The administration had preliminary talks with the unions, but no negotiations. A criticism of the mayor by the public and Greater Scranton Chamber of Commerce, which hired Mr. Amoroso for the city and paid his $30,000 six-month fee, has been that the mayor gave up leverage by pushing the commuter tax before the union concessions.

■ Triple the annual Local Services Tax from $52 to $156, to raise $4.95 million a year.

A state bill to allow a tripling is pending in Harrisburg. If enacted, the city should direct an unspecified amount of this additional LST revenue to cover debt that will be needed to pay to the police and fire unions and their now-$22 million-and-growing backpay judgment from the landmark arbitration award of 2011.

■ Sell and/or lease the Scranton Sewer Authority and put the city’s estimated $20 million share into the pension system.

Mr. Bulzoni said this plan is in preliminary stages. The authority that serves Scranton and Dunmore would have to authorize its dissolution for a sale or lease to occur. Scranton has four of the five seats on the sewer authority; Dunmore has one. Scranton’s current members were appointed by former Mayor Chris Doherty.

Mr. Courtright has sent mixed signals on the plan to sell the sewer authority. While Mr. Amoroso’s contract stated a sale of the sewer authority was one area to explore, Mr. Courtright earlier this year said he did not intend to sell the authority.

At that time, Mr. Courtright asked the Scranton members of the authority to resign so he could appoint new members.

They refused.

Now, a key aspect of Mr. Courtright’s recovery plan, as devised by Mr. Amoroso, is a sale or lease of the sewer authority. It has been reviewing a potential sale of the authority or other dispositions, such as a public-private partnership, partly to determine how best to carry out costly, long-term mandates to reduce pollution of waterways that feed the Chesapeake Bay. Last month, the authority hired a Chicago firm to evaluate various sale, privatization and management options for the agency and its assets.

The first of these property tax hikes will be contained in the 2015 budget that the mayor will propose and council will act on later this year. These real estate tax increases would follow the 56.7 percent increase in the 2014 budget, the final one of Mr. Doherty and the former council.

The Courtright administration is considering for the 2015 budget dedicating tax millage to paying debt service, Mr. Bulzoni said. Part of that would involve having only one ‘paying agent’ of debt payments, with the goal of streamlining processes, minimizing costs and time management, and maximizing interest of funds maintained on deposit until remitted.

■ Restructure debt of the city, Scranton Parking Authority and new debt that will be needed to pay to the police and fire unions the $22 million-and-growing landmark court award.

The city pays more for loans and financing because it does not have a bond rating, Mr. Bulzoni said. Still, “there’s an opportunity to look at some debt restructuring under a structure that’s favorable to the city,” he said.

Such refinancing would include SPA’s “stranded” debt, or the amount leftover after a sale of parking garages and for which the city still would have to repay, as well as the $22 million award due to the unions.

A component of the investment community “chases yield,” meaning they may buy city bonds because the city would pay a premium. For example, 10-year treasury bonds are at a 2.5 percent yield, and the city cannot obtain financing at interest rates that low, he said.

“But some investors might come to the city with interest in buying (city) debt at between 2.5 to 5 percent” interest, he said. “The timing of looking at restructuring might be good, because of the historic interest-rate environment.”

■ Phase out the city’s business privilege and mercantile taxes, starting with a 25 percent cut in 2015; a 50 percent reduction in 2016 from the 2014 levels; and full elimination in 2017. These are considered “classic nuisance taxes” that can really hurt small businesses, especially those with thin profit margins, Mr. Bulzoni said.

■ Urge the Lackawanna County commissioners to authorize a long-overdue countywide property tax reassessment that would benefit the city.

Because the last countywide reassessment was conducted in the mid- to late-1960s, assessments are out-of-whack and hurt Scranton. A reassessment could net the city $1.35 for every $1 in today’s property tax revenues. In other words, if the city had an accurate assessment, it could have raised 35 percent more property tax revenue compared to 1994 without raising tax rates simply because property assessments would be higher.

However, getting a reassessment done is seen as a longshot because it would have to be authorized by the commissioners and could cost the county up to $8.4 million.

Mr. Courtright said he will ask for a reassessment, but hasn’t done so yet because he and his administration have been preoccupied with the parking authority issues.

■ Appoint a commission of stakeholders and governmental officials to study sharing of services.

“There is some recognition that there are some things to do regionally, like the SAPA (Scranton-Abingtons Planning Association Comprehensive Plan) plan and a land bank. There may be alternatives to create some efficiencies (through sharing services), especially when you have questionable staffing levels (in City Hall).”

■ Consider dissolving the Bureau of Refuse (trash collection) and replacing it with an authority for both trash collection and stormwater runoff management.

The stormwater requirements of the federal Clean Water Act are administered under the state Department of Environmental Protection. While stormwater often flows into the sewer system of the Scranton Sewer Authority, the city holds the state Municipal Separate Storm Sewer (MS4) permit for stormwater management.

“We’ve had some discussion about (creating) a stormwater authority,” Mr. Bulzoni said.

Mr. Bulzoni said the idea is not to create a new bureaucracy, but rather, “The question is, are there efficiencies that can be achieved (with a storm water authority). The stormwater system is deficient right now,” and the costs to separate old stormwater lines from the sewer system are “staggering.”

There would be trade-offs from a new storm water authority that takes over trash collection. The city would lose a $1.5 million surplus from trash collection, but would gain advantages. Those include: the city would transfer the cost of paying employee benefits to an authority; it could collect storm water revenue fees and/or tax impervious surfaces to "add a potentially significant new source of revenue for the city” that would not discourage economic activity; sewer rates could fall from having less of a need to treat storm water; and a storm water authority would have access to two revenue streams - trash collection fees and storm water taxes/fees - that could be used to issue revenue bonds for infrastructure improvements.

■Review city assets to determine ownership; assess and record the nature of the city’s relationship to any asset that the city does not entirely own.

“The intent is to identify and determine what assets the city has,” Mr. Bulzoni said. “Are we using them efficiently, can we monetize them.”

This review has not yet begun.

Much to do

While the laundry list of tasks ahead is daunting and will take time to accomplish all of them, the moves made so far are already showing some progress, the mayor said.

After issuing the recovery plan and enacting of the commuter tax, the city early last week had some “serious interest from the financial community about doing business with city,” Mr. Courtright said.

On Wednesday, a report by credit ratings firm Moody’s Investors Services called the city’s commuter tax to shore up a shaky pension system a “credit positive” step.

As more facets of the recovery plan are implemented, the city’s fiscal health should improve, the mayor said.

“Obviously, we can’t do them all at once, but everything that’s in the plan, we are going to do,” Mr. Courtright said.

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